Dazzled by dividend dates?

Ex date, record date, books closing date, payable date: dividends seem to have almost as many dates as you’d find at Sydney’s Slip Inn on a Friday night.

Luckily for us, there are only two dates that really count for investors: the ex date and the payable date (or payment date as it’s sometimes known). If these were the only dividend dates you knew about, you could still live a happy and prosperous life.

From a company’s point of view, the only dates that really matter are the books closing date (also known as the record date) and the payable date. But we’re getting ahead of ourselves.

T+3—The Settlement Day

When a company declares a dividend, in addition to the amount per share, it also declares a books closing date (which, as we’ve noted, can also be called the record date). This means that all shareholders who are on the company’s share register at that date will receive the dividend.

But in order to be on the share register at that date, investors need to have bought the shares at least three business days earlier. It’s all to do with T+3 settlement. Now, that’s not a reference to an Arnold Schwarzenegger film; it’s simply the procedure for settling trades on the ASX. When investors buy shares through their broker, the moment the trade is executed the investor becomes the economic owner of the stock, and bears the gains or losses from movements in its price.

But the actual day the trade is settled—when money is exchanged and the stock is transferred from seller to buyer—doesn’t occur until three business days after the trade is executed.

This gives the people whose job it is to execute settlement a chance to iron out any problems or disputes before settlement day. So, in order to hold the stock on the books closing date, and therefore receive the dividend, you need to have bought it three business days earlier.

Fortunately, instead of making investors do their own calculations and risk stuffing it up, especially around public holidays, the ASX does it all for us. After a company declares the books closing date, the ASX informs the market of the date investors need to have purchased by in order to be on the register at the books closing date.

Date with the ex

That ASX-stipulated date is known as the ex date. If you buy a stock before the ex date, you’re entitled to the dividend. If you buy it on or after the ex date, then you will not receive the current dividend. And that’s why it’s important for investors to understand this particular date.

On the ex date, all things being equal, the shares should fall in price by the value of the dividend. So it’s important not to panic because the stock has fallen a few per cent overnight. You’ll be compensated by your dividend payment in a few weeks’ time.

Of course, all things rarely are exactly equal, so a share will typically fall a little more or a little less than the dividend, depending on all the other factors that affect it on a day to day basis.

The payable date is the date on which the company posts out the dividend cheques to those entitled to them. Or, for those using direct credit, the day the funds will be transferred to you. Investors who participate in a dividend reinvestment plan (DRP) will receive shares in lieu of cash around this date. (Find out more about DRPs).

Dividend stripping

With all this confusion, you won’t be surprised to hear that there’s a strategy that aims to exploit it. It’s known as ‘dividend stripping’ and it involves buying a share shortly before its ex date, collecting its dividend and associated franking credits, and then selling it soon after.

As long as the stock falls by less than the amount of the dividend, it’s easy profits. Unfortunately, though, the sharemarket isn’t in the habit of providing investors with a free lunch. As we mentioned earlier, when a share goes ex, all things being equal it will fall by the amount of its dividend.

To make matters worse, the Tax Office may not let you have your franking credits if you don’t hold your shares for long enough. Ask your accountant about the ‘45-day rule’ if this might apply to you.

Dividend stripping simply won’t work consistently enough these days to be profitable—if it ever did. In addition to paying extra tax, you’ll just end up making your broker rich with all that buying and selling. And why would you want to do that?

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